Input VAT Refund After Transitioning to Leasing Under the Encouragement of Capital Investments Law: An Article in Calcalist

A developer who deducted input VAT on land and construction of apartments for sale, and subsequently received approval to lease them under the Encouragement of Capital Investments Law, is required to refund the input tax. In an article published in Calcalist in January 2026, Adv. (CPA) Shlomi Vaknin and Adv. Ariel Epstein ask whether the Tax Authority may demand the refund without any time limitation, and answer in the negative: the refund is made through an amended return and is subject to a five-year statute of limitations.

Leasing under the Encouragement of Capital Investments Law is exempt from VAT pursuant to Section 31(1) of the VAT Law, and therefore, under the matching principle, the deduction is no longer justified. The obligation to refund was established in Tax Appeal 67/92 Pam Bein and Tax Appeal 113/96 Mitzpe Masua. According to the authors, receiving the approval does not constitute a "change of use" that triggers a tax liability, and the only way to refund the input tax is to amend the return in which it was deducted, by filing a supplementary return for that period. This was determined in case law, and the Tax Authority itself adopted this approach in an interpretive directive.

The assessment authority under Section 77 of the VAT Law is limited to five years from the filing of the return, and according to the article, an amended return may also be filed only within five years. Therefore, the authors argue, after five years from the original return there is no basis to demand a refund. The statute of limitations works in the opposite direction as well: a dealer who did not deduct input tax because the asset was designated for exempt transactions, and later changed the designation, will be unable to deduct after five years.

On 30.12.2025, the Tax Authority published Reportable Position 15/2025, according to which the refund is made in the current periodic return following receipt of the approval. The position relies on Tax Court Case 37543-07-14 Ostis, which, according to the authors, did not address the statutory provisions regarding amended returns and is therefore erroneous. They add that the Authority applies the position only when it increases revenue: when five years have not elapsed, it collects linkage differentials and interest from the date of the original return, while in the opposite direction it does not permit a deduction in the current return.

According to the article, the position is being challenged in appeals in which the authors serve as counsel. They recommend that developers report in accordance with the law, and carefully examine any refund demand with proper legal guidance rather than accept an assessment based on the position.